How carbon offsets can change low-income weatherization programs.

The low-income energy efficiency movement still needs to leverage money. Most everyone who is involved in residential energy efficiency is aware that DOE’s Weatherization Assistance program received $5 billion to weatherize low-income homes under the American Recovery and Reinvestment Act (the Recovery Act) during the 2009-11 time frame. DOE expects approximately 600,000 homes to be weatherized with this unprecedented stream of federal funds. However, the fact remains that even after the Recovery Act money is expended, there will still be 30 million low-income homes that have not been weatherized. The need for funding to tackle that enormous task will remain great, and the environment for continued large-scale federal appropriations for low-income weatherization will be challenging at best.

Many low-income advocates had hoped that government policies to place a price on greenhouse gas emissions would produce a financing mechanism to help weatherize more low-income homes. On its face, this seems to be a promising opportunity. After all, placing a price on CO2 and other greenhouse gases would create a market for carbon offsets, a mechanism whereby polluters would be able to buy a reduction in emissions from someone else at a lower price than they might pay to reduce their own emissions. Low-income energy efficiency programs can produce just such offsets, with the reduction in greenhouse gases from comprehensive weatherization of low-income homes estimated at 2.65 metric tons of CO2 per home per year, or 53 metric tons over the life of the measures for heating and cooling alone. Why not sell the emissions reductions as offsets and use the proceeds to weatherize more low-income homes?

The prospects for a nationwide emissions reduction market now seem rather dim, with the failure of Congress to pass a cap-and-trade law. Such legislation would have capped emissions of greenhouse gases and reduced them over time. It would also have created a market for allowances, or the right to emit 1 ton of CO2 equivalent, along with a companion mechanism for the sale of offsets to help reduce the cost of compliance. As allowed emissions ratcheted down, the value of an allowance or an offset would have increased, providing a potential funding stream for offset providers like low-income weatherization programs.

The demise of cap-and-trade in the 111th Congress does not mean that the potential for the sale of offsets to fund weatherization has been eliminated, but it does complicate matters. Greenhouse gas emissions reduction programs -- both mandatory and voluntary -- remain in the United States and in other parts of the world. In Europe, one such program is the European Trading Scheme (ETS). It forms part of the European Union’s effort to comply with the 1997 Kyoto Protocols, following the United Nations Framework Convention on Climate Change. The ETS is a mandatory program, and the purchase, sale, and trading of allowances and offsets therefore take place in what is called a compliance market.

The Regional Greenhouse Gas Initiative (RGGI) is the first market-based regulatory program in the U.S. to reduce greenhouse gas emissions. Ten Northeastern and Mid-Atlantic states have capped and will reduce CO2 emissions from the power sector by 10% by 2018. Similar programs and markets may emerge among some U.S. states and Canadian provinces.

In addition, there are voluntary markets for emissions offsets in which businesses, institutions such as universities and hospitals, and even families and individuals can purchase offsets in order to reduce their carbon footprint. Anybody with a modicum of computer savvy can Google "carbon offsets" and find organizations willing and ready to help calculate his or her carbon footprint, and sell corresponding offsets to reduce it. Bloomberg News Service estimates that in 2009 the world market for carbon offsets was 94 million metric tons with a value of $387 million, though this value is likely to have declined in 2010, with the continued sluggish international economy and the failure of the United States to pass climate change legislation. American sources provided 56% of the offset supply in the voluntary markets.

Residential energy efficiency poses some unique challenges in the sale of offsets, some of which are discussed below. The General Accountability Office, the investigative arm of Congress, in its examination of voluntary markets, found that 85% of U.S. offsets came from three categories of activity. The three were methane capture from mines and landfills (49%), carbon capture and storage (19%), and biological sequestration (17%), largely through planting and reforestation. Methane capture and biological sequestration are relatively inexpensive to implement and are easily measured. Nonetheless, EPA estimates that about 18% of U.S. greenhouse gas emissions come from residential energy use, so the potential for efficiency-based offsets is substantial.

While the market for emissions offsets still exists, the challenges for low-income efficiency programs that are trying to develop and sell offsets are substantial. These can be categorized in three ways -- as challenges posed by standards, by costs, and by prices.

Standards

Not all offsets are equal. The requirements placed on offset providers to demonstrate the validity of their product vary enormously. At one extreme, the United Nations has created the Clean Development Mechanism (CDM). This program is designed to encourage organizations that need offsets in the industrialized countries, such as those of the ETS, to invest in and purchase emissions reductions from the developing world. CDM offsets, called Certified Emissions Reduction (CER) credits, are high in value, selling for over $16 a ton in summer 2010; however, it is difficult to gain regulatory approval for them from the United Nations. In its most recent review, the CDM rejected 22 out of 43 projects. At the other end of the spectrum are voluntary projects, sometimes bilateral in nature between individual buyers and sellers, where no third-party verification is involved at all.

In general, offsets that are being sold or traded in various exchanges have to meet certain standards; they must be proven to be additional, quantifiable, real, and permanent.

Additionality is the standard for demonstrating that the emissions reductions claimed as offsets would not have occurred without the funding stream provided by the purchase of the offset itself. In other words, they would not have occurred in a business-as-usual world. According to the General Accountability Office, a variety of tests have been created to measure additionality. These tests include financial, regulatory, or timing tests -- all of which are intended to demonstrate that the emissions reductions would not have occurred without the purchase of the offset.

If emissions reductions are to be sold as offsets, they must also be quantifiable and real. After all, a market requires a standard measure of the commodity, in this case generally 1 metric ton of CO2 equivalent, so that buyers know what they are getting. The offset provider has to have a mechanism for measuring the emissions reductions in these terms, and proving that the claimed reductions can be, and are being, measured by agreed-upon metrics.

Finally, offsets must be proven to be permanent. An offset project may produce initial emissions reductions that are measured and quantifiable -- but will the reductions persist over the time period claimed?

The CDM applies only to projects in Kyoto Annex signatory countries in the developing world. Kyoto Annex signatory countries are those which comply with the Kyoto Protocols. In addition, a number of organizations have emerged to establish and validate standards for offsets, both voluntary and compliance. These standards may apply to projects outside the Kyoto Annex. Among these standards are the Gold Standard and the Voluntary Carbon Standard. The Gold Standard, created by the World Wildlife Fund, is a nonprofit organization recognized by environmental organizations around the world and acknowledged to have stringent criteria for measuring additionality, thorough project review for effectiveness and sustainability, and third-party verification. It recognizes only renewable-energy and energy efficiency projects. The Voluntary Carbon Standard (VCS) is also a nonprofit organization. VCS’s founding partners -- the Climate Group, the International Emissions Trading Association (IETA) and the World Economic Forum -- convened a team of global carbon market experts to draft the first VCS requirements to establish a recognized and standardized carbon offset marketplace. The World Business Council for Sustainable Development (WBCSD) joined the effort soon after. The VCS recognizes all projects, as long as they follow an established VCS methodology.

Meeting the offset standards poses numerous challenges for residential energy efficiency projects, and that includes weatherization projects. Perhaps the greatest challenge, however, is establishing the validity of energy savings estimates in a cost-effective way. While weatherization can be shown to realize substantial average savings in a large group of households, the amount saved varies considerably from home to home. It is therefore necessary to establish a recognized project basis that includes a large enough group of homes to make it possible to measure savings through vendor energy bills, and to establish a baseline against which to measure these savings. Another problem is how to measure persistence over time. This has always been a challenge in program evaluation for residential energy efficiency programs, given the mobility of households, and the fact that the number, and lifestyles, of the residents may change.

The leader in the effort to establish a methodology for qualifying weatherization projects for the sale of offsets has been the Maine State Housing Authority (MSHA), DOE’s weatherization grant manager for the state of Maine. MSHA, with its partners at the Pennsylvania and New Jersey housing agencies and its consulting experts, has been working with the VCS to establish an accepted methodology for weatherization projects. Their system, now under review, would cover comprehensive residential energy retrofits, building envelope and heating/cooling system retrofits, and appliance replacements. The process would include pre- and postretrofit audits, energy bill analysis with control groups, and deemed energy savings.

Costs

There is no question that effective residential energy efficiency programs not only save energy and reduce energy bills, but also reduce greenhouse gas emissions. According to DOE’s Energy Information Administration, every gallon of home heating oil contains 22.5 lb of CO2, and every therm of natural gas contains 11.7 lb of CO2. Reductions in electricity emissions due to improved efficiency vary depending on the fuels used to power the generators, but they are very large in places where coal is the primary energy source.

The challenge for residential energy efficiency is not simply to reduce emissions, but to do so at a cost that is competitive with other offset projects. As noted above, weatherized households are expected to reduce emissions for heating and cooling by an average of 53 metric tons over the life of the measures. At an estimated cost of $3,030 per weatherized household, emissions reductions would cost $57 per ton, well above the price now being paid for offsets in the ETS, the most stringent, and therefore the most costly, market.

In order for weatherization to participate in the tradable offset market, it will have to develop mechanisms to identify the most cost-effective energy efficiency measures with the highest related carbon emissions reductions -- most likely those involving electric energy efficiency -- and package those separately from other energy efficiency measures. This also means that areas with the highest energy savings from the most carbon-intensive fuels are most likely to be able to jump the cost-effectiveness hurdle. For example, home heating oil is 38% more carbon intensive than natural gas per million Btu of energy, so New England, with high home heating oil usage and high heating degree-days, is probably a good candidate for early offset sales. Similarly, electrically heated and cooled homes in the Midwest, where much of the electric generation is coal fired, might also provide an early market for weatherization agencies.

learn more

To learn more about emissions and low-income weatherization, visit the Weatherization Plus website, www.weatherizationplus.org, to download PDFs or read reports online.

Price

The other side of the cost issue is the market price for carbon emissions reductions. If buyers are unwilling to pay for carbon offsets, all other questions are moot. The failure of cap-and-trade or carbon taxes to gain legislative traction, together with the failure of the Copenhagen Climate Conference of 2009 to establish mandatory emissions reductions requirements, has dampened interest in the purchase of carbon emissions offsets. The price of emissions offsets has reflected this dampening. For example, bids on the Chicago Climate Futures Exchange for offsets for December 2010 for the RGGI were $1.91 per ton. The slow pace of both domestic and European economic recovery has also dampened the price of emissions offsets. The slow economy has meant diminished electricity demand. This has made it relatively easy for emitters to meet targets for reductions in both RGGI and ETS, without having to compete for allowances or offsets. This situation is likely to be reversed as the pace of economic recovery picks up and as the reduced emissions standards under RGGI and the individual states begin to gain traction.

Still other issues remain to be addressed as weatherization programs seek to compete in the emissions offsets markets. One of these is the issue of ownership. Ownership rights must be clearly established before emissions offsets can be sold or traded. The funding under weatherization comes from the federal government through grants to the states, funding local subgrantee weatherization activities in individual residences. Utility ratepayer funds often supplement DOE funding. The DOE, the Department of Health and Human Services, utilities, state governments, local community action agencies, and individual homeowners are all potential claimants.

Conclusion

The prospects for the sale of emissions offsets as a means of funding low-income weatherization remain real, but they will not be soon or easily realized. Pioneering this work are some members of the weatherization network, such as MSHA, who are laying the groundwork for weatherization to participate in carbon offset markets when conditions in those markets improve. Even so, carbon offset sales are likely to be profitable for a subset of the weatherization community where residential energy use is both high and carbon intense.

Joel Eisenbergis Program Manager for Oak Ridge National Laboratory's support project for the DOE Office of Weatherization and Intergovernmental Program.

This article was sponsored by DOE's Weatherization Assistance Program, through the Oak Ridge National Laboratory.

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